FIRST WORD

King Without Clothes

Not to put too fine a point on it, the King code on
corporate governance is being made to look like
claptrap. After more than three years since the
committee's revised report was heralded as the
beacon for boardrooms, a moral of the children's
fable is revealed: King has no clothes.
Its report encapsulated the noblest intent. Its practice is a
corporate marketing exercise clothed in the striking
imagery of respectful compliance. Otherwise, it's
business as usual.

Two recent examples suffice. Both have
implications for retirement-fund trustees,
liable similarly to company directors for
fiduciary duties.

One is in the creditors' settlement
with non-executive directors of insolvent
Leisurenet, from which individual and
institutional shareholders get nothing.
Leisurenet's board had ticked all the right
boxes for King compliance. To the
extent that these directors admitted
responsibility for loss, they were covered
by fidelity insurance whose premiums
had been paid by the company. Thus is
the deterrent of personal liability
side-stepped (see box).

So, too, with fund trustees, provided
fidelity cover is taken on their behalf, but
with an important difference.

This will mean an added cost to fund members. It will
also mean they needn't be as intimated by their duties,
which is not necessarily a positive. At least the barrier to
entry is lowered by diminished personal exposure were they
to be sued.

The other example, from a wholly different perspective,
is in the disgrace of R51 million being awarded as a "share
appreciate rights" bonus to Shoprite chief executive Whitey
Basson in addition to the R7 million salary he received for
arriving at work this year. The disgrace is less in the
egregious amount than in shareholders, many being
institutions representing retirement funds, allowing it to
happen.

Not one institution actually attended the meeting at
which the bonus was approved, or kicked up stink
beforehand on the consequences of the Shoprite
remuneration formula that had earlier been disclosed. Only
20 percent of shareholders opposed the resolution, and this
by the non-confrontational means of proxy. If ever there
were an instance where shareholders should have attended a
meeting, to register their protest by shouts, this was it.

A la King, Basson's package had been processed by a
Shoprite remuneration committee. Formalistically and
farcically, it therefore bears the imprint of good corporate
governance. In effect, remcos are less independent of
management than King likes to purport and shareholders
have less influence over executive remuneration than they
like to pretend. Except when it comes to naming and shaming.
This happened, conspicuously, a few years back with
selected Nedcor executives who were to have enjoyed a
bonus from efforts that had little to do with their own
performance. Public pressure, in the form of pure noise,
caused the scheme to be abandoned.

In the case of Basson, there's been no noise in time to
cause the scheme's abandonment. And although Basson's
efforts must have contributed significantly to Shoprite's
profits, for which he receives a generous salary – marketrelated
because remcos define the market, peer pressure
pushing it to levels ever-more obscene – they cannot be said
to have defined the share-price appreciation.

Share prices move in market cycles. Globally and locally,
they've been moving north. South Africa's retail sector, of
which Shoprite is part, has enjoyed an unprecedented
consumer boom fuelled by low interest rates and the
availability of imports from Chinese sweatshops. Shoprite
has been able to capitalise on both but did not create either.
Bully for Basson, who keeps the cash irrespective of
sustainability or penalty had fortune not favoured him.

King is premised on "shareholder activism", a fine
oxymoron (words conflicting with one another) as it turns
out. The code extends the concept to "stakeholders",
including consumers, who are supposed to be the recipients
of regular and intelligible information affecting them.

Ask the life offices about that one. Ask the Pension
Funds Adjudicator too. Or ask stakeholders whether they're
left any the wiser by the technical bumf that the JSE obliges
listed companies to communicate.

Retirement funds, through institutions, are custodians
for the savings of roughly 10 million South Africans. Often,
they are the only vehicles for the savings of black workers.
To avoid tokenism, so that corporate behaviour is
influenced by talking inside the offices of companies rather
than by marching outside in the streets, they need a
champion.

For far too long in South Africa, shareholder activism
has been described as in its infancy. It has to be the oldest
infant around, a teenager frightened to get behind the
steering wheel of daddy's car.

It mocks the objectives of King, and it frustrates the
onset of corporate democracy.

Allan Greenblo
Editorial Director

QUOTES FROM KING

In the Leisurenet context, consider this:

"Civil remedies are available to shareowners
in that contraventions of the provisions
often give rise to a delictual action and even
personal liability. The exposure of directors
and managers to such civil liability is an
important regulatory and enforcement tool."

In the Shoprite context, consider this:

"Sanctions should be visited upon . . .
institutional shareholders who fail to attend
shareholders' meetings of companies in
which they are invested. Directors and
managers of financial institutions such as
insurance companies, and trustees and
managers of financial retirement funds,
who do not attend shareowners' meetings
of companies in which they have a certain
prescribed limit of investment . . . or who
fail to send representatives to such
meetings, should be censured."